2 drug manufacturers go to court to turn 340B into a rebate program

Two leading drug manufacturers have pressed forward with efforts to reformat the 340B Drug Pricing Program, filing lawsuits against the federal government over the question of whether savings can be offered as cash rebates rather than up-front discounts.

Johnson & Johnson took HHS and the Health Resources and Services Administration (HRSA) to federal court in Washington, D.C., on Nov. 12, roughly two months after HRSA issued a statement that J&J’s plan to make 340B discounts available only through rebates for two frequently used drugs was impermissible under the program’s statute. HRSA later said moving forward with the model would result in termination of the manufacturer’s 340B agreement.

Eli Lilly initiated a lawsuit in the same court Nov. 14, looking for authorization to implement what it describes as a “cash replenishment model” for 340B providers.

Seeking big changes

Under J&J’s proposal, a hospital would need to pay full price for the drugs Stelara and Xarelto and then submit commercially standard claims data within 45 days of administering or dispensing the drug. The hospital would then receive a rebate that brings down the price to the discounted amount.

“Claim validation simply involves confirming with HRSA’s database that the product was purchased by a DSH covered entity registered in the HRSA database, that the product was dispensed or administered by that same registered covered entity, and that the claims data submission occurred within 45 days of the dispense,” J&J states in its lawsuit.

“This case is about J&J’s efforts to bring much-needed transparency to the 340B program today,” the lawsuit states, adding that the 340B agreements signed by manufacturers allow for leeway to use a rebate model.

The company has claimed that disproportionate share hospitals comprise fewer than 10% of all 340B covered entities yet account for 78% of 340B purchases (such a discrepancy can be at least partially explained by patient volumes). The amount of 340B drugs bought by DSH hospitals increased by 22% year over year in 2022 and 25% in 2023, per the lawsuit.

A more comprehensive approach

Eli Lilly’s proposed model is more expansive than J&J’s, appearing to encompass all 340B covered entities and all of the company’s Medicare Part B drugs. Eli Lilly said it has contracted with a healthcare technology company to create the program, which will feature weekly cash payments to providers.

The program “will ensure that manufacturers are not forced to make duplicative price concessions across interlocking provisions of the 340B statute, the Medicaid statute and the IRA [Inflation Reduction Act],” Eli Lilly’s lawsuit states.

A 2024 final rule revamped the administrative dispute resolution (ADR) process for 340B. It established the circumstances that allow manufacturers to take cases of potential duplicate discounts or drug diversion to ADR, as providers can for instances when they are not permitted to buy a 340B drug at or below the ceiling price.

But Eli Lilly said 340B procedures create “opacity” that make conducting the requisite ADR audits difficult for manufacturers.

The company said it will not deny rebates to providers based on duplicate claims with respect to Medicaid but rather will settle up with state Medicaid programs.

A concern about the IRA from the manufacturer’s perspective is that the law and accompanying regulations lack a regulatory mechanism for avoiding duplicate discounts with regard to the 340B price and the negotiated price for the drug, as well as between the 340B price and mandatory inflation-based rebates for Part B and Part D drugs.

Hospitals weigh in

The American Hospital Association (AHA) described J&J’s lawsuit as “completely meritless.”

“We look forward to the courts rejecting J&J’s plan to put profits over people,” Chad Golder, general counsel for the AHA, said in a written statement.

After J&J’s announcement of the rebate model, the AHA wrote a letter to HRSA, saying, “340B hospitals will be forced to spend their limited resources acquiring these drugs at exorbitantly high prices while they wait months for J&J to honor its 340B obligations.” (J&J says rebates “will typically be paid seven to 10 days following timely submission of 340B claims,” even though the validation process for claims can take much longer.)

“In addition, disproportionate share hospitals, which already operate on the thinnest of margins, will be forced to develop pricey administrative mechanisms to make and track rebate requests,” the AHA wrote. “And J&J will essentially transform itself into the ultimate arbiter of whether a rebate should be approved and paid, with the likely consequence of J&J denying rebates to hospitals that they appropriately owe.”

America’s Essential Hospitals echoed some of those sentiments in its own letter, saying the resulting delays in receiving discounts would impose “a meaningful economic hardship on essential hospitals, many of which have limited cash on hand.”

The additional administrative costs “do nothing to improve patient care and are designed to place an undue burden on providers that can’t afford it,” the letter states. “It appears J&J designed this policy with the hope some hospitals won’t be able to navigate the new red tape it has put in the way of discounts it owes to hospitals.”

Views of policymakers

One key as the lawsuits proceed will be whether HHS and HRSA under the incoming Trump administration interpret the matter similarly to the Biden administration. Republicans generally have favored a greater emphasis on transparency and on using stringent criteria to determine provider eligibility for the discounts.

Meanwhile, President-elect Donald Trump’s nominee to be the next HHS secretary is Robert F. Kennedy Jr., who is not known to have stated an opinion on the program.

At least some Republicans in Congress have joined Democrats in objecting to the rebate model. In the House, a bipartisan group of 189 members sent a letter to HHS in late September, saying J&J’s model was in defiance of the 340B statute.

“Congress intended 340B to enable the nation’s safety-net hospitals that serve a disproportionate share of patients with low incomes as well as those living in rural areas (and other covered entities) to stretch scarce federal resources as far as possible, reaching more eligible patients and providing more comprehensive services,” the legislators wrote. “A rebate model would severely undermine that purpose.”